Asian Bonds Brave Global Tensions, but Concerns Remain
Asian bonds held their ground as geopolitical tensions escalated. However, interest rate uncertainty, and cost pressures cast a shadow.
SSGA Fixed Income Portfolio Strategists
Asian bond markets were flat in February 2022, with the Markit iBoxx ABF Pan-Asia Index returning 0% on an unhedged basis in United States dollar (USD) terms. Meanwhile, the index was down by -0.42% on a USD hedged basis. Cross-market performance was mixed, but Asia managed to weather the turbulence from the Russia-Ukraine War, unlike other emerging regions such as Central & Eastern Europe (CEE).
Foreign-Exchange (FX) Return
Return (in USD)
Recovery in Thailand supports a positive growth outlook
Thailand (+1.95%) was the best performer following a rally in its currency, the baht. This was driven by an optimistic medium-term outlook for Thailand’s economy as COVID-related restrictions were eased. In particular, the vital tourism sector was more upbeat. There was also evidence of stronger consumer demand, as reflected in a reassuring gross domestic product (GDP) growth report for the fourth quarter of 2021. For 2021 as a whole, GDP expanded by 1.6%, which was far better than the market had expected. The Bank of Thailand’s February policy statement noted that prices would be higher in the first half of 2022 due to some temporary factors, but there was no indication of a broad-based increase in the prices of goods and services.
Foreign investors return to Indonesia
Indonesian assets also performed well (+0.84%) amid a meaningful pickup in demand. February saw foreign investor holdings of Indonesian fixed income increase by IDR 9.3 trillion – a move that partially reversed the sizable outflow of IDR 83 trillion witnessed last year. Meanwhile, Bank Indonesia left the interest rate unchanged at 3.5%. This was despite consumer inflation rising to 2.18% in January 2022 and growing expectations that the US Federal Reserve (Fed) will raise interest rates and reduce its economic support program at a quicker-than-expected pace. The central bank emphasized that inflation should remain manageable and within its 2%–4% target range for 2022, as the gap between the economy’s actual growth and its ability to expand remains negative.
Currency strength provides support
China delivered a positive return (+0.52%), mainly due to the renminbi’s position as a managed currency that tends to outperform when global risk intensifies. Also, despite repeated COVID outbreaks and a weak housing market, China’s growth has remained resilient, led by manufacturing exports. However, threats to the growth outlook remain, given surging global oil prices and slower overseas demand – especially from the EU, China's second-largest trading partner.
Malaysia boosted by higher oil prices
Malaysia experienced flat returns over the month (+0.06%). The market expects Bank Negara Malaysia (BNM) to leave interest rates unchanged (1.75%) at its March 2022 policy meeting. As the only net oil-and-gas exporter among the major emerging-Asia economies, Malaysia is set to benefit from higher oil prices. Furthermore, its fuel subsidies mean that a hike in energy costs will have less of an impact.
Inflation concerns dent investor confidence in Korea
Korea’s bonds weakened over the month (-0.34%). Even though the Bank of Korea (BoK) kept interest rates unchanged at 1.25% – a unanimous decision that was in line with expectations – the sharp increase in the BoK's inflation forecasts for 2022 (from 2% to 3.1%) and 2023 (from 1.7% to 2%) led investors to believe that price rises are more ingrained than previously thought. Current global tensions could also cloud the BoK's timetable for a return to more ‘normal’ monetary conditions.
COVID restrictions and interest-rate worries dampen Hong Kong
Hong Kong was down by -0.41%, with the local bond and foreign exchange segments losing momentum. From travel bans to business closures, tighter virus control measures have raised the possibility of an extended slump. Also, given Hong Kong mirrors US monetary policy (due to a linked exchange rate), it will be forced to raise borrowing costs when the Fed hikes interest rates. According to a Bloomberg survey of economists, GDP growth is now predicted to contract by 1% in the first quarter of 2022.
Cost pressures cloud Singapore’s outlook
Singapore also retreated in February 2022 (-0.91%), with local bonds and FX underperforming. The Monetary Authority of Singapore (MAS) faces high commodity prices, supply-chain bottlenecks, and labor shortages. And in a surprise announcement well in advance of the scheduled decision in April 2022, the MAS will allow the Singapore dollar to strengthen more quickly against other currencies. Indeed, rising cost pressures from elevated oil prices, at a time when core inflation is at its highest in more than nine years, could see the MAS adopt a more hawkish policy stance.
Rising prices unsettle investors in the Philippines
Finally, the Philippines was the region’s worst performer (-2.46%), which was largely driven by the local-bond component. At its policy meeting in February 2022, the central bank raised its inflation forecasts to 3.7% for 2022 and 3.3% for 2023. Philippine bonds subsequently sold off amid fears that rising oil and food prices, coupled with a depreciating peso, may trigger further inflationary pressures. That said, the central bank signaled that it had no intention of following global central banks by raising interest rates, given its commitment to supporting economic growth. Also, the bank expects inflation to ease and return to target in 2022.
Source: State Street Global Advisors for commentary, Bloomberg Finance L.P. for economic data, Barclays for Asia's composite Purchasing Managers' Index data, IHS Markit for Markit iBoxx ABF Pan-Asia Index data, and return data showing in the performance table, as of 28 February 2022.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Past performance is not a reliable indicator of future performance.
Diversification does not ensure a profit or guarantee against loss.
Currency Risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
International Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA's express written consent.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Projected characteristics are based upon estimates and reflect subjective judgments and assumptions. There can be no assurance that developments will transpire as forecasted and that the estimates are accurate.
The views expressed in this article are the views of SSGA Fixed Income Portfolio Strategists through the period ended 28 February 2022 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This article is issued by State Street Global Advisors Singapore Limited and has not been reviewed by the Securities and Futures Commission.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.